Rep. Brad Miller: 'There is no chance that Congress would pass more TARP'

I'd previously scheduled an interview with Rep. Brad Miller (D-N.C.) to talk about the financial regulation bill. But Miller is known as one of the House's leading experts on the mortgage market, so given the news of the day, our interview quickly focused on the crisis in foreclosures -- its effect on the economy and, in particular, on the big banks. We might be in a situation, Miller says, where the banks need another bailout, but there's no way they can get one. And what then?

An edited transcript of the interview follows.

Ezra Klein: What’s happened to the mortgage market? It’s odd to say that the new foreclosure crisis is that the foreclosures have had to stop, but that’s the new reality, right?

Brad Miller: There is massive potential liability for the securitizers, which are mostly the biggest banks. The contract was that if mortgages didn’t meet certain requirements, then the securitizer would buy them back. The mortgage servicers and trustees have exclusive control over the paperwork. Both the investors, the people who own the mortgage-backed securities, and the homeowners, really depend on them. There’s been lots of litigation where investors try to get securitizers to buy back the bad mortgages because they were flawed, but that litigation has been stymied by procedural objections. If the private investors can break through that defense and require the mortgages that don’t meet the requirements to be bought back, the liabilities for the biggest banks will be enormous.

EK: So this is, in other words, a problem for bank balance sheets. These banks bought the mortgages from individuals, packaged them into securities, and then sold them to investors. But because the mortgage contracts weren’t valid, the investor can potentially force the banks to take the mortgages back, thus blowing a new hole in their balance sheets?

BM: Right. They’ll have to buy them one mortgage at a time. Someone said there might be a second round of bank insolvencies because of this and there might need to be more TARP. There is no chance that Congress would pass more TARP.

EK: What does this mean for the economy? When people first hear about it, it almost sounds good. No more foreclosures? Great! Let the banks suffer for a while.

BM: It’s kind of easy to take pleasure in all this and think the banks are being hoisted on their own petard, but it’s all bad for the economy for the mortgage market to be in such turmoil, to not know whether the right to foreclose will be enforceable. It’s a great deal of uncertainty and makes it much harder for private investors to get back into the mortgage market. It will probably make home buyers more uncertain because there’ll be a lot of mortgage holders who are not going to be paying their mortgages or be foreclosed upon.

I don’t think any member of Congress has been more critical of the Obama administration to do more about foreclosures. I introduced the cram-down legislation, I’ve written pieces saying TARP funds should be used to buy mortgages and modify them. I’ve been very vocal that the housing sector is an enormous part of our ongoing financial pain. But this does not accomplish the solution to the mortgage problem. It’s hard even to see how it ends. But I’ve got to think it creates more uncertainty about the health of the banks. [Treasury] Secretary [Timothy] Geithner testified before the Financial Services Committee a few weeks ago and I asked him whether this litigation had been taken into account in the stress tests, and he said he wasn’t sure. At the least, we now have resolution authority that we can take out for a spin.

EK: Granting that Congress won’t touch anything like TARP, could it create any momentum behind addressing the housing market in a more systemic way? It seems to me that there’ll eventually need to be some action to let banks work off their contracts, but at the same time, there’s no way Congress can let the banks off the hook here without helping homeowners. What about something like “cram down,” where homeowners can go to court to get their principal brought down?

BM: The politics of bankruptcy modification was that every Republican was against it, and then we lost a lot of Democrats. We got it through the House, but it had a lot of compromises, and it was very hard. It failed in the Senate. Senator [Richard] Durbin [D-Ill.] was its champion, and he says he thinks we’ll eventually come back to it. He hates the term “cram down,” by the way. But if we lose several seats in the Senate, it’s hard to see them getting the votes to do that with every Republican being against it. I think we’ve got a terrible economic problem at a time in our politics when we have political paralysis.

EK: Originally, this interview was about something you said at a Roosevelt Institute conference last week, which was that we’d know if the financial regulations bill was working because bank profits would fall. Why is that your measure?

BM: It’s really more an indicator than anything else. The growth of profits in the industry is an indication that something is wrong. When a market is working properly, it squeezes profits, squeezes cost. In a working market, you would not see the kind of compensation we’ve seen in that sector. You would not see the profits we saw in that sector. They were more than 40 percent of total corporate profits. Which really means that the switch for market forces was in the off position.

EK: That’s not very intuitive to people, I think. Our shorthand for Wall Street is “the market.” How can the market not be a working market?

BM: The asymmetry of information. The banks knew what was in the mortgages that homeowners were signing and the homeowners did not, and the banks knew what was in the mortgage-backed securities they were selling to investors and the investors did not. The asymmetry worked fabulously well for the parties with the information. If we created a market where the investors knew what they were buying and the homeowners knew what they were signing, the profits for the intermediaries would be dramatically lower.

EK: What’s in the bill that you consider particularly important going forward? What are you watching and trying to protect?

BM: The front end, the consumer protection part, is more important to overall financial stability than it’s been given credit for. We did get anti-predatory mortgage legislation into the bill. If the mortgage market is free of the type of abuses we saw in the last decade, that would be enormous. It’s easy for people to say that the banks will find something else, but they won’t find something like mortgages. Mortgages are by far the biggest asset. It’s $12 or $14 trillion in debt. Credit card debt is $800 billion. If money is not gushing into the financial system from homeowners, that will make a big difference. And I think the profitability is going to be an indicator of whether market sources are working and whether banks are taking big risks. The practices that led to the crisis in 2007 and 2008 were leading to huge profits in 2005 and 2006. If the profits get back up there, it might be a sign they’re taking too much risk again.

Federal cram down legislation is one of the few ways I can see out of this. Lenders on crammed down mortgages should receive the right to future appreciation of the residence, and homeowners should have to pay income taxes on the sale of of the residence if any debt was forgiven.

Another TARP is is not needed as long as the banks can continue to clear a profit off of the difference between what they pay the Fed to borrow money and what the Treasury pays the Banks to borrow the same money.

According to Miller it now seems the banks are bound by contract to "make good" on an enormous amount of shoddy product, but the only solution he gives is "No more TARP".

He then expresses concern over the uncertainty of not knowing "whether the right to foreclose will be enforceable." There is no uncertainty when contract law is enforced rather than bent to the benefit of the banks Miller seems so beholden to. Miller's disrespect for law is what is creating uncertainty. Of course, Miller has to do what he can for the customers of so much of the debt he produces through over spending.

There is an incestuous relationship between the banks and government and Miller is only an enabler.

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We love Brad Miller here in Raleigh!! I canvassed for him (and our other Democratic candidates today). Even Republican voters like him because he's got common sense and is a realist -- doesn't say anything that is not backed up by facts. How many candidates can you say that about these days??

1) The "big banks", aka securitizers, packaged the loans and sold them to investors with a "warranty" embedded within the agreed upon contract.

2) With a weakening economy it became obvious that the Big Banks' product was faulty.

3) The "Big Banks" are aware that much of the needed documentation required to foreclose is AWOL.

4) The "Big Banks" don't want to make good on their warranty (contract) as they don't want properties that they may not be able to foreclose on. As Brad Miller said, the liabilities would be enormous.

5) The Big Banks would rather stick you with houses that you can't sell due to a poor chain of title and inability to get title insurance.

Miller's response to this? "If the private investors can break through that defense and require the mortgages that don’t meet the requirements to be bought back, the liabilities for the biggest banks will be enormous."

This is not a ringing endorsement for abiding by the law as spelled out in the contract between the investors and the Big Banks. Not forcing the banks to live up to their contract will force the problems they created onto the people of this country.

All Miller has to do was say that the Big Banks need to abide by their contract. He didn't.

But apparently your Okay with Brad Miller siding with these Big Banks over the people of North Carolina yet again.

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